Data as of June 30, 2019 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS JUNE 2019 YTD
Alerian MLP Index (AMZX) 2.64% 16.96%
Alerian Midstream Energy Select Index (AMEIX) 3.20% 22.41%
ICE BofAML U.S. High Yield Energy Index (HY Energy) 1.52% 7.48%
S&P 500 Energy Index (S&P Energy) 9.72% 13.13%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy market gets a boost from oil price rebound: Energy markets bounced back after a tumultuous May, aided by a combination of rising crude prices and a strong month for equity and credit markets. Crude, which has historically traded with a correlation to stocks of 0.33, has tracked the equity market more closely so far this year, with a correlation of 0.65.1 Prices gained 9.3% last month as risk assets rose and expectations increased that OPEC would extend supply cuts through at least the end of the year. S&P Energy, which includes many large integrated producers with high exposure to commodity prices, returned 9.72% on the month. Midstream equities recorded a solid month and continue to lead the sector year to date, aided by a strong U.S. production backdrop. Domestic supply rose to 12.2 million bbl/d by the end of April, a new record. On July 1, OPEC+ agreed to extend production cuts into 2020, another positive for crude prices going forward.1

Midstream midyear check-in: Halfway through the year, it is a good time to step back and analyze how midstream has performed over the first six months. The sector has provided stellar returns, with the AMEIX recording its best first half since 2016 and the AMZX with its best since 2013.1 The positive performance has certainly been aided by a strong equity market, but company financial performance has also been solid. With all companies now having reported Q1 earnings, we can dig into the numbers. For the AMZX, 64% of firms beat median EBITDA estimates, while just two out of 36 companies cut their dividend for Q2. For the AMEIX it was much of the same, as 67% of companies beat earnings estimates and just one of 38 cut payouts to investors.2 These results suggest that despite volatile oil prices and an uncertain economic backdrop, the midstream sector’s exposure to ever-growing U.S. production of oil and natural gas will continue to drive opportunity in the space. As we look to the second half of the year, commodity prices could certainly continue to show volatility, and equity markets are unlikely to record another six months of 18.5% returns.1 However, we believe the midstream sector offers attractive potential for income and total return, and operating results continue to illustrate that.

KEY TAKEAWAY

  • The energy sector rebounded in June alongside crude oil and broader equity markets.
  • S&P Energy was June’s top performer as crude prices rose by 9.3% during the month.
  • OPEC+ agreed to extend production cuts into 2020, a positive tailwind for crude prices.

1 Bloomberg.
2 Bloomberg. Earnings estimates represent median Bloomberg EBITDA estimates for the calendar quarter ended March 31, 2019.


Index descriptions: Alerian MLP Index is the leading gauge of energy Master Limited Partnerships (MLPs) and is a float-adjusted, capitalization-weighted index, whose constituents represent approximately 85% of total float-adjusted market capitalization. Alerian Midstream Energy Select Index is a composite of North American energy infrastructure companies and is a capped, float-adjusted, capitalization-weighted index, whose constituents are engaged in midstream activities involving energy commodities. ICE BofAML U.S. High Yield Energy Index is designed to track the performance of U.S. dollar-denominated high yield rated corporate debt publicly issued in the U.S. domestic energy market. S&P 500 Energy Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) energy sector.

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This energy market commentary and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The energy market commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such energy market commentary. The energy market commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the energy market commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.